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I am Still Convinced that Not Investing in Gold and Resource Stock is Insanity

By Al Korelin      Printer Friendly Version
Sep 5 2008 12:22PM

www.kereport.com

I wrote an article for Kitco on July 2nd where I went on record as saying that I felt that people who did not invest in gold were really missing the boat. (The specific word that I used was insane.)

Since that time, the price of gold has fallen almost fifteen percent and resource stocks have performed even worse.

As far as the economy is concerned, the only thing that has not gotten worse is the price of oil, which has come down a bit, By the way, so has consumer sentiment. Conversely, inflation and unemployment have both increased. The housing sector is absolutely abysmal unless you are a cash rich buyer and there aren’t too many of them around. Folks who are looking to refinance their mortgages so they can get cash out of their homes are, for the most part, out of luck. They are out of  luck because lending standards have been significantly increased back to the levels where they should have always been.

Many of the guests who appear on The Korelin Economics Report, are predicting gloom and doom lasting into next Spring for the resource stocks while, at the same time, expressing bullish sentiment about the prices of precious metals.
I completely agree with my colleques when it comes to their sentiments regarding gold and silver.

A high rate of inflation has always been positive for the price of both gold and silver and that is what we have today. Goldbugs have known for some time that the real rate of inflation has been growing. Mainstream Americans who believed that the number, as it was defined by the Clinton administration to not include energy and food, was under control got a real wake up call earlier when the government reported that the producer price index was increasing at an annualized double digit rate.

Gold also moves in the opposite direction to the U.S. dollar as it is measured against an index of other currencies. Lately the U.S. dollar has been moving up. As a matter of fact it is currently up about 10% from where it was back in July.

Is this trend going to continue? I hardly think so.

How can the value of our dollar increase when you have daily headlines like the following: “Nation’s retailers report a back-to-school bust” or “Wall Street Industrials and materials lead the way down as worries over growth and a global slowdown plague the market”

How about the fact that so far this year the Dow Jones Industrial Average is down 15.65%, the Standard & Poor’s 500 Index is down 15.77% and the Nasdaq Composite Index is down 14.83%?

In the current economic environment the value of the U.S. dollar simply cannot continue to increase at the rate it has over the past couple of months.

So okay, things are looking good for gold and silver. But, what about the values of the resource companies stocks?

I believe that the fundamentally sound exploration, development and production companies will see their stock values increase sooner rather than later.

Most of the current activity in this market is propelled by short-term investors who have a real need for liquidity. They are experiencing an increase in their cost of living, they are unable to generate cash from their homes, some of them are loosing their jobs and, as a group, they are selling whatever stocks they can regardless of their respective prices. As John Embry said on the Korelin Economics Report a few months back, they are just plain scared.

I have to believe that readers of this column and listeners of my radio show are smarter than that. You are people who understand today’s market and what a buying opportunity it represents. You realize that as the price of gold and silver increases so will the price of the related companies. Please do me a favor, don’t educate your friends until those of us who know better take advantage the bargain basement resource stock prices that exist today.

 

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Al Korelin is the host of the internationally syndicated Korelin Economics Report radio program and the President of A.B. Korelin and Associates, Inc. – a regulatory consulting firm that has been providing services to mining companies for the past 27 years.